Singapore Stock Alpha Picks (Nov 2021) - UOB Kay Hian 2021-11-03: Short DBS & OCBC, Remove InnoTek & UMS, Add iFAST, ThaiBev, Civmec & Uni-Asia


Singapore Stock Alpha Picks (Nov 2021) - Short DBS & OCBC, Remove InnoTek & UMS, Add iFAST, ThaiBev, Civmec & Uni-Asia

UOBKH's Singapore Stock Alpha Picks

Adding iFAST, Thai Beverage, Civmec and Uni-Asia.

  • We have added
  • We have also included two recent initiations of coverage:
    • Civmec (SGX:P9D) given its record earnings in FY22, a robust orderbook of A$1b and an underappreciated defence business, and
    • Uni-Asia Group (SGX:CHJ) which represents deep value given favourable demand/supply dynamics within the dry bulk industry.

DBS (SGX:D05) – SELL (Adrian Loh)

OCBC (SGX:O39) – SELL (Adrian Loh)

  • Tactical short on financials. Our tactical short on financials is a near-term call given that Sea will see a higher inclusion factor within the MSCI Singapore index in Nov 21. Given that financials have the biggest weights within the index, this sector will likely see a selloff relative to other stocks. As at 1 Nov 21, DBS (SGX:D05) and OCBC (SGX:O39) had the top two largest weights within the index with 20.77% and 14.49% respectively. On the other hand, Sea’s current weight of 11.86% will nearly double to around 20% at the end of November.
  • We emphasise that our recommendation to short the Singapore financials is not a fundamental call as we maintain our BUY ratings on both DBS (SGX:D05) (target price: S$35.80) and OCBC (SGX:O39) (target price: S$15.65).
  • Share Price Catalysts:
    • Higher weighting of Sea Ltd in the MSCI Singapore index.
    • Timeline: 1 month.

Civmec (SGX:P9D) – BUY (John Cheong)

  • One of Australia’s leading construction and engineering services providers to three key sectors: defence, resources and energy. Civmec (SGX:P9D)’s notable clients include Chevron, Rio Tinto, Alcoa Australia, BHP, Thyssenkrupp and the Royal Australian Navy.
  • We expect Civmec to deliver record earnings (+18% y-o-y) in FY22 (fiscal year ending June), backed by a robust orderbook of A$1b. Its orderbook has almost doubled from A$0.6b in 2017. In FY21, Civmec delivered a strong earnings growth of 94% y-o-y. Civmec’s 1QFY22 earnings grew 62% y-o-y and sees a strong pipeline of new projects in the sectors it operates in. It also sees new opportunities in the green energy space.
  • Massive potential in new defence business underappreciated. In Apr 18, the Royal Australian Navy awarded a huge contract to Civmec and Lurssen Shipyard to construct 12 OPVs by 2029. The contract is worth around A$3b and is part of the country’s A$89b continuous shipbuilding contract.
  • Initiate coverage with BUY and target price of S$0.98, pegged to 12x FY22F P/E (1 standard deviation below its five-year mean). We think the current valuation of 9x FY22F P/E for Civmec is attractive, given its strong growth profile and orderbook, especially in the defence sector which has a long tenure and high barriers to entry. Peers are trading at 15x FY22F P/E.
  • Initiation report: Civmec Limited - UOB Kay Hian 2021-10-18: Leading Contractor With Huge Orderbook In Defence & Commodity Sectors.
  • 1QFY22 results: Civmec - UOB Kay Hian 2021-10-29: 1QFY22 Results Above Expectation; Positive Outlook With More Opportunities.
  • See
  • Share Price Catalysts
    • Earnings surprise due to higher-than-expected contract wins and margin.
    • Better-than-expected dividend.
    • Takeover offer by strategic shareholder given the high entry barrier of defence business.

iFAST Corporation (SGX:AIY) – BUY (Clement Ho)

  • AUA growth exceeds expectations; interim dividend raised. Growth in assets under administration (AUA) for iFAST Corporation (SGX:AIY) has remained robust, reaching S$18.38b as at 30 Sep 21 (+46.1% y-o-y, +4.8% q-o-q). 3Q21 net revenue rose 32.6% y-o-y to S$30.3m, while EBIT and PATMI grew at a slower pace of 22.4% and 23.4% to S$9.1m and S$7.5m respectively, owing to lesser government grants and a net investment loss from debt instruments. Correspondingly, EBIT margin (based on net revenue) dipped to 30.0% (-2.5ppt y-o-y), while PATMI margin remained stable at 13.7%. 3Q21 interim dividend was raised by 63% to S$0.013 (3Q20: S$0.008).
  • Positive momentum in AUA growth likely to remain. iFAST has proven it is able to capture the growing pie of the wealth management industry in its key markets across Asia, driven mainly by the shift towards digitalisation. The longer-term structural dynamics are favourable to iFAST as the percentage of managed wealth in Asia grows. This will be driven mainly by China, as financial markets there continue to open and help spur growth in the Asian wealth management industry.
  • Several new growth avenues ahead. These include:
    1. Malaysian stockbroking service on the FSMOne.com investment platform to help strengthen the group’s position as a multi-asset investment platform, and help the company move towards its objective of becoming a holistic fintech platform, and
    2. HK eMPF Platform.
  • Unfortunately, financial details still cannot be disclosed at this stage. However, iFAST did provide its financial targets for 2024-25 for the overall Hong Kong market: 2024 and 2025 gross revenue of > HK$1b and HK$1.5b respectively, vs 2020’s HK$252m, 2024 and 2025 net revenue of > HK$800m and HK$1.2b respectively, vs 2020’s HK$107m, and 2024 and 2025 PBT margin of > 15% and > 33% respectively, compared to 2020’s 30%. To recap, the project has a two-year implementation period to be completed by end-22, and a seven-year operation/maintenance period thereafter.
  • Maintain BUY with DCF-based target price of S$11.50. Our DCF assumptions comprise a WACC of 7.0% and a terminal growth rate of 3.0%. We note that the 2022 implied P/E valuation of 73.1x may appear elevated, but it is supported by the high earnings growth phase that iFAST is currently undergoing.
  • See
  • Share Price Catalysts
    • Events: Stronger-than-expected AUA growth, award of Malaysia digital banking licence.
    • Timeline: 3-6 months.

Thai Beverage (SGX:Y92) – BUY (Llelleythan Tan)

  • Return of international tourism. Vaccinated travellers from 63 countries are allowed to enter Thailand without quarantine from 1 Nov 21 onwards, providing a boost to Thailand’s battered tourism sector. Increasing tourist arrivals would help boost domestic alcohol consumption and volumes. Commanding 95% and 40% of the domestic market share for spirits and beer respectively, Thai Beverage (SGX:Y92) is expected to benefit from Thailand’s reopening.
  • Lifting of nationwide alcohol ban and nightlife venue closures. In line with Thailand’s reopening, Thailand’s authorities have allowed for the sale and consumption of alcohol in restaurants/eateries in four popular tourist locations. The government is also considering lifting the ongoing nationwide alcohol ban and reopening nightlife entertainment venues by Dec 21. We reckon this would help boost Thai Beverage’s on-trade alcohol consumption and volumes.
  • Vietnam and IPO to follow suit. Vietnam is gradually reopening its economy as the country transitions from a zero COVID-19 policy. Vietnam’s government has recently allowed the sale and consumption of alcohol in restaurants in two districts on a trial basis, which may be extended nationwide if successful. Also, consideration for Thai Beverage’s IPO of its beer business may resume as market conditions improve.
  • See
  • Share Price Catalysts
    • Events: lifting of nationwide alcohol bans in Thailand and Vietnam, full reopening of international borders in Thailand and Vietnam, IPO of the beer business.
    • Timeline: 3-6 months.

Uni-Asia Group (SGX:CHJ) – BUY (Clement Ho)

  • Drybulk operator with solid dividend track record. Listed on the Singapore Exchange since Aug 07, Uni-Asia Group (SGX:CHJ) operates two key segments: shipping and property. Under shipping, Uni-Asia Group has a combined fleet of 18 handy-sized drybulkers, with 10 wholly-owned and eight jointly-owned. The fleet is typically hired out on a time charter basis, with Uni-Asia Group undertaking most of the voyage expenses, including bunker, port, fuel and crew costs. Uni-Asia Group has a solid dividend track record since 2017 and continued paying dividends despite a loss-making 2020.
  • Freight rates to remain elevated till at least end-22. The recent spike in drybulk freight rates was primarily caused by a supply squeeze (as vessels are stuck longer in ports) and strong demand for various commodities. Furthermore, a meaningful increase on the supply end is absent, based on the global outstanding orderbook for smaller-sized vessels (up to 40,000 dwt). This is because buyers are staying on the sidelines of new orders in anticipation of new ESG standards on vessel emissions. Also, any new vessel orders placed now will still require at least 24 months of construction. We believe the perfect storm has begun for a demand surge in the dry bulk industry, where shipowners will likely benefit with the anticipation that freight rates will stay elevated into end-22.
  • Renewal of vessels’ rate to boost earnings. Of the 10 wholly-owned dry bulk carriers, six are up for renewal in 2H21 and three in 1H22. Based on current freight rates, we estimate that 2H21 and 2021 revenue would rise 38% and 42% respectively on a y-o-y basis, translating to a significant EPS turnaround in 2H21 at US$0.0457 (2H20: -US$0.0497) and 2021 at US$0.217 (2020: -US$0.098). As charter rates remain elevated in 2022 given the industry supply shortage, our estimates suggest a revenue growth of 15% in 2022, which implies a two-year CAGR of 27.1% over 2020-22.
  • Initiate coverage with BUY and a target price of S$2.34, pegged to 8x 2021F P/E (-1 standard deviation to the mean). This compares to regional peers which trade at an average 8.6x 2021F P/E. Current valuations for Uni-Asia Group are attractive at 4.8x/4.2x 2021/22F P/E and 2022 dividend yield of 4.3%. Historically, the low valuation peg appended to Uni-Asia Group was due to a lack of liquidity, which we believe will improve given the strong earnings profile.
  • Initiation report: Uni-Asia Group - UOB Kay Hian 2021-10-28: Under-The-Radar Drybulk Operator Set To Benefit From High Freight Rates.
  • See
  • Share Price Catalysts
    • Higher-than-expected freight rates in the handysize segment, better-than-expected cost management.
    • Timeline: 3-6 months.

Ascott Residence Trust (SGX:HMN) – BUY (Jonathan Koh)

  • Benefitting from reopening and recovery in the EU and the UK. The EU had eased a longstanding ban on non-essential travel to member states in May 21. It launched digital vaccination certificates to allow travel without the need for quarantine within the bloc on 1 Jul 21. The UK has reopened its international borders by allowing fully-vaccinated travellers from EU member states to enter England, Scotland and Wales without the need for quarantine since 2 Aug 21 (the UK previously imposed a 10-day self-isolation requirement). The UK is currently enjoying a staycation boom.
  • Ascott Residence Trust (SGX:HMN)’s Europe portfolio, which accounts for 20.4% of its total assets, benefits from the recovery in intra-regional travel and reopening of international borders.
  • Enhancing diversification and resiliency by building scale in long-stay assets. Ascott Residence Trust has acquired three student accommodation properties in the US (Georgia Institute of Technology, University of South Carolina and Texas Tech University) and three rental housing properties in Japan (Sapporo) in 9M21. Student accommodation provides resilient and stable income streams as leases typically last for a year. The allocation to these long-stay assets increased by 6ppt year-to-date to 11% of portfolio value. Student accommodation provides higher gross margin compared with 50% for other hospitality assets. Ascott Residence Trust has a medium-term plan to increase asset allocation to student accommodation and rental housing to 15-20% of portfolio value, which will enhance resiliency.
  • See
  • Share Price Catalysts
    • Yield-accretive acquisitions for student accommodation and rental housing properties.
    • Contribution from lyf one-north, its maiden development project, which is scheduled for completion in 4Q21.
    • Timeline: 6-12 months.

SingTel (SGX:Z74) – BUY (Chong Lee Len & Chloe Tan)

  • Monetisation of Optus tower asset for A$1.9b. Optus announced that it is selling a 70% stake in Australia Tower Network (ATN) – a wholly-owned subsidiary that houses Optus’ towers – to AustralianSuper for A$1.9b. The stake sale values ATN at 38x FY21 EV/EBITDA, or EV/sites of around A$1m/tower and while it is a premium vs Telstra’s recent tower sales and appealing vs traditional telco multiples of 8-12x EV/EBITDA, this premium is reflective of the loss of control by Optus (which will retain only a 30% minority stake post divestment).
  • The end game: A regional digital infra player. Beyond unlocking value, the long-term goals for SingTel (SGX:Z74) are to:
    1. drive organic growth through strong management,
    2. partner with capital providers to expand regionally, and
    3. focus on smart capital management to potentially explore JVs.
  • This will allow them to set a regional digital infrastructure platform across multiple asset classes.
  • Positive monetisation exercise by Singtel. We are positive on the monetisation exercise to drive future data centre portfolio worth S$7b-8b. To recap, SingTel will continue to execute its strategic reset targets, following the repositioning of Amobee and Trustwave in May 21 and its digital infrastructure strategy. The focus will include:
    1. capitalising the digital/IT growth trend via strategic partnerships,
    2. leveraging its infrastructure assets (data centres, towers and fibre) to unlock value,
    3. sweating its key assets, and
    4. investing in 5G for network superiority and future monetisation.
  • This is expected to help SingTel bridge the current market valuation gap as a conglomerate.
  • Maintain BUY with a DCF-based target price of S$2.75 (discount rate: 7%, growth rate: 1.5%). At our target price, SingTel will trade at 13x FY22F EV/EBITDA (5-year mean EV/EBITDA). SingTel currently trades at 1 standard deviation below its 5-year mean EV/EBITDA of 13x.
  • See
  • Share Price Catalysts
    • Events: successful monetisation of 5G, and faster-than-expected recovery in Optus’ consumer and enterprise businesses.
    • Timeline: 6-12 months.

Wilmar International (SGX:F34) – BUY (Leow Huey Chuen & Jacquelyn Yow)

  • Another record quarter earnings for 3Q21. Wilmar International (SGX:F34)'s 3Q21 core net profit came in above expectations despite a weak performance from China. Palm and sugar operations delivered one of the best set of results for 3Q21.
  • Good earnings momentum for 4Q21, on track for another record core profit in 2021. Post briefing, we remain positive that Wilmar International is on track to deliver a record net core profit for 2021 since its listing. Overall, good earnings from the palm and sugar divisions are sustainable into 4Q21 with improvement from its China operation. Wilmar International’s diversified business model again paid off well this year with the weak performance from China well compensated by its palm and sugar operations.
  • Adani Wilmar Limited (AWL) listing target by mid-Dec 21. This is a relatively smaller IPO vs the listing of Yihai Jerry Arawana (YKA). The IPO roadshow has started and is on track to be listed by mid-Dec 2021. The listing of AWL would be positive for Wilmar International to unlock shareholder value. The IPO proceeds will mainly be used to fund AWL’s expansion in India, especially to expand their product range, which will eventually mirror the business model in China.
  • See
  • Share Price Catalysts
    • Events: Listing of AWL and expected to announce strong 4Q21 results by end-Feb 22.
    • Timeline: 2-4 months.

Lendlease Global Commercial REIT (SGX:JYEU) – BUY (Jonathan Koh)

  • Redevelopment of Grange Road Car Park to draw more youths to 313@Somerset. Construction for the redevelopment of Grange Road Car Park into a multi-functional event space is scheduled to commence by end-21. The project is 100% pre-committed and is anchored by Live Nation, a leading live entertainment company listed on NYSE. The event space is expected to be operational by early-23.
  • Sewing up the remaining 68.2% stake in Jem. Lendlease Global Commercial REIT (SGX:JYEU) is on track to complete the acquisition of a 28.1% effective stake for S$337.3m in Jem by 4Q21 at the latest. The two funds – Lendlease Jem Partners Fund (LLJP) and Asia Retail Investment Fund 3 (ARIF3) – have reached their liquidity window this year whereby all investors have to decide whether to hold or divest Jem. Being the largest investor in LLJP and ARIF3, Lendlease Global Commercial REIT has significant influence over the decision. The company plans to sew up the acquisition of the remaining 68.2% stake in Jem worth S$1.2b-1.4b within the next 12 months.
  • Maintain BUY. Our target price of S$1.01 is based on dividend discount model (cost of equity: 6.0%, terminal growth: 1.0%).
  • See
  • Share Price Catalysts
    • Events: redevelopment of Grange Road Car Park, and acquisition of Jem.
    • Timeline: 6-12 months.

Genting Singapore (SGX:G13) – BUY (Vincent Khoo, Jack Goh)

Frasers Logistics & Commercial Trust (SGX:BUOU) – BUY (Jonathan Koh)

Sea Limited – BUY (Clement Ho)

  • Solid growth in 2Q21 revenue. Sea Limited’s (Sea) 2Q21 GAAP-revenue of US$2.28b (+158.6% y-o-y, +29.3% q-o-q) surpassed our estimate, led by higher-than-expected bookings from continuing solid momentum in the self-developed hit, Free Fire. We believe the strong momentum should sustain into 2H21.
  • E-commerce tracking well. Segment 2Q21 revenue grew 30.1% q-o-q to US$1.2b (+160.7% y-o-y), driven by the increased scale of Shopee and higher income from transaction-based fees, value-added services, and advertising. Gross orders totalled 1.4b (+127.4% y-o-y, +27.3% q-o-q), with gross merchandise value (GMV) at US$15.0b (+87.5% y-o-y, +19.0% q-o-q). Shopee continued its global expansion into Poland and Spain in Sep 21 and Oct 21 respectively, which should contribute to overall GMV going forward.
  • Maintain BUY with target price at US$370.76, based on a blended PEG average of peers. The implied 2021F adjusted operating income of 73.5x, which excludes sales & marketing and R&D expenses for more effective comparison, is supported by Sea’s 5- year adjusted operating profit CAGR of 52.7% over 2020-25. The target price translates to 22.4x 2021F price-to-sales, backed by a 3-year revenue CAGR of 73.8% over 2020-23.
  • Share Price Catalysts
    • Events: Earlier-than-expected reduction in cash burn, further market share gains for Shopee in their operating regions.
    • Timeline: 3-6 months.

ComfortDelGro (SGX:C52) – BUY (Llelleythan Tan)

  • Recovery in progress. Once Singapore’s COVID-19 infection numbers taper down, ComfortDelGro (SGX:C52) is set to benefit from Singapore's economic reopening. With 84% of the population fully vaccinated, favourable tailwinds such as Singapore's transition to endemic living and the reopening of Singapore’s international borders through Vaccinated Travel Lanes, should give a boost to ComfortDelGro’s rail and taxi ridership moving forward.
  • Wind in its sails: ComfortDelGro released details regarding its IPO listing on the Australian Stock Exchange (ASX) slated for 4Q21. Using a A$125m FY22 EBITDA forecast and 11.5x FY22 EV/EBITDA multiple from its closest peer on the ASX-Sealink Travel Group (SLK AU), ComfortDelGro’s Australian business would be valued at around A$1.5b, adding an additional 8- 9% upside to our current target price (S$1.90). The group also recently announced the tender win for Auckland Rail Franchise by its JV entity. The contract amounts to S$1.13b over eight years and is expected to contribute marginal earnings accretion from 2022 onwards.
  • Favourable transition to boost ridership. Australia has repositioned its “zero-COVID” approach to endemic living as vaccinations rates near 80% in Victoria and New South Wales. Relaxation in COVID-19 restrictions would also help boost ridership in these two critical states. UK operations will likely remain stable given its high vaccination rates but the emergence of a new Delta subvariant may hinder progress.
  • See
  • Share Price Catalysts
    • Events: Lifting of COVID-19 stay-home restrictions in Singapore, unlocking of value in Australia business, regulatory changes for Downtown Line financing.
    • Timeline: 3-6 months.

Yangzijiang Shipbuilding (SGX:BS6) – BUY (Adrian Loh)

  • For Yangzijiang Shipbuilding’s end-customers, container shipping remains strong with A.P. Moeller- Maersk recently raising its guidance for 3Q21 and full-year 2021 as continuing bottlenecks in supply chains have led to higher freight rates. Although two major global container liners – Hapag Lloyd and CMA CGM – have instituted rate freezes, this may partially be a strategy to regain market share after having lost ground to smaller players outside of the three major shipping alliances. The Shanghai Container Export Index continues to remain on an upward trend after having risen 98% year-to-date and up 24% thus far in 2H21.
  • Traditional year-end spike in end consumer demand will continue to support container rates with US retailers’ inventory-to-sales ratio at 30-year lows. As a result of this, the Far East to North America route, which has already seen rates increase 33% y-o-y, will remain robust in our view. In the longer term, the 2024-25 period will witness the delivery of the majority of the current record global orderbook of 3.3m TEUs of containerships; however, the shipping association BIMCO believes that higher long-term rates will ensure the profitability of these vessels.
  • 9M21 gross profit of RMB2.6b made up around 60% of our full year 2021 estimates, however we remain sanguine given that:
    1. the revived Chango yard will be nearly fully ramped up in 4Q21,
    2. the acquisition of the remaining 20% of the Xinfu yard was completed at end-3Q21 thus enabling full profit contribution from 4Q21 onwards, and
    3. another 10-15 vessels to be delivered in the current quarter.
  • While 3Q21 gross margins for shipbuilding were lower y-o-y, we highlight that 3Q20 margins were a high base given that Yangzijiang Shipbuilding had material deliveries of very large containerships. Importantly, 3Q21 gross profit margins of 13.2% were in line with our estimates and management guidance.
  • We believe that Yangzijiang Shipbuilding remains compelling as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 5.5x and 0.7x respectively, a 2022 PEG ratio of 0.2 and net cash of S$0.47/share (or 33% of its current share price).
  • See
  • Share Price Catalysts
    • Events: New order wins, shipbuilding margin expansion from 4Q21 onwards, better returns on its debt investments portfolio, and divestment of its debt investments arm.
    • Timeline: 2 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-11-03
SGX Stock Analyst Report BUY MAINTAIN BUY 15.350 SAME 15.350